Sustainable Investing
1 minute read
The global economy is undergoing a profound transformation. From governments to boardrooms, supply chains, industries and energy sources are being rethought and reshaped in fundamental ways.
These seismic changes are being driven by geopolitical and energy security concerns, changing weather patterns, consumer demand, and—more recently—grid constraints stemming from AI’s insatiable demand for power. The movement is picking up in size and speed, and we expect it to accelerate further, providing a compelling opportunity to invest ahead of the curve.
Supported by regulation and driven by private capital, investments into the transition have driven down costs, increasing adoption and bringing the opportunity to a turning point. While investments in this space have, until recently, consisted almost exclusively of early-stage funding of revolutionary technologies, enabling software and infrastructure, that’s no longer true today. In recent years, the investment opportunity has expanded to require later-stage capital, where market players are looking to scale up operations to meet market demand.
An estimated $5 trillion in capital will need to be spent annually through 2050 in order to meet global decarbonization targets1
We believe now is the time to consider investing in the transition, especially in the private markets, for the following reasons:
This opportunity set spans multiple industries, geographies and sectors, and it is important to note that many of the opportunities include long-term capital commitments and loss of tangible liquidity, as well as operational and technological risks that investors should consider before making an investment. In an effort to understand the breadth and scope of the opportunity set, we believe it is helpful to delineate its key segments and their relative stages of maturity.
The different stages of maturity of these sub-sectors have two major implications for investors looking to access the theme.
First, this is currently a primarily private markets opportunity. An investor seeking access in public markets will find a limited set of options, mostly concentrated in the renewable energy, electric vehicle (“EV”) and battery sectors. These represent only a portion of both the financial return and investment opportunity. Investors will hear echoes of tech investing in the early 1990s, when the companies that went on to define the market were at the beginning of their ascents but not yet accessible through the stock market.
Secondly, as noted earlier, most private market investments in these areas have been concentrated earlier in the capital stack. This has allowed winning business models to grow into companies that are now ready to scale and meet the market opportunity. However, the funding needed to support their growth has not yet emerged at the scale needed. This has given rise to the rather pessimistic terms of the “Missing Middle” or the “Valley of Death.” We prefer to view it more pragmatically—a “Mountain of Opportunity”—and as a potential source of significant returns for investors who have the ability to allocate capital strategically.
At J.P. Morgan, we aim to deliver ideas and insights that help our clients navigate and invest in the future. If you have questions about investing in the ongoing revolution in the green economy, contact your J.P. Morgan team.
1 BloombergNef, “Energy Transition Investments Trends 2024.”
3 Photovoltaic cells convert sunlight into energy, and they are a vital component of solar power generation systems.
4 McKinsey, International Renewable Energy Agency (IRENA).
5 (IAE, economist).
6 Fuels made from biological sources, meaning plant or animal material.
7 Aircraft fuels that are produced sustainably, and because they are chemically similar enough to jet fuel, they can be “dropped in” to existing fuel systems without major changes.
8 Materials sourced or produced sustainably, especially for use in building construction, renovations, and infrastructure projects.
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